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How Minimum Wage Laws Created the Company Store

The following quote is from page 442 of the 3rd edition (1972) of what is correctly regarded by many to be the greatest economics textbook ever written, University Economics by Armen Alchian and William Allen (original emphasis):

Company stores were owned by the employer, who sometimes paid employees in credit good only for purchases at a company store.  The prices in the company store were higher than elsewhere, so the employee got a lower real wage.  But why would anyone be his employee if the real wage was lower than that available elsewhere?  Why wouldn’t the employer simply pay lower wages and abandon this more expensive roundabout means of paying lower wages?  Were both employers and employees stupid?  The answer is simple.  The employee knew what he [the employer] was doing.  He was cutting a legal minimum wage rate.  For example, if the minimum payable wage is $1.60 an hour and if the open market wage is $1.00 for this type of labor, the laborer could agree to work for $1.60 on the condition that he spend his earnings in the company store, where he would pay high prices.  In effect, he would net only $1.00 an hour.  Such was the reason for the payment of wages via credit at company stores.

The analysis in the above paragraph is a splendid example of how learned, wise, and brilliant economists use economics to better understand reality.  This analysis also highlights the fact that the dimensions of employment contracts are many.

Efforts by the state to arbitrarily change one dimension (say, by mandating higher hourly wages) are rather easily offset by changes in other dimensions.  Yet because many of these dimensions remain invisible, especially to minds that are not as brilliant as those of Armen Alchian and Bill Allen – and because even many of those dimensions that are made visible by sound economic reasoning nevertheless cannot be quantified and measured – the notion that the advisability of government policies can be determined exclusively, or even mainly, by looking at “the data” is a dangerous scientistic pretense.

Republished from Cafe Hayek.

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